Singapore steps up inflation fight in dual currency rally

(Bloomberg) – Singapore’s central bank has tightened monetary policy settings further and raised its inflation forecast, pushing the currency higher as it seeks to tackle cost pressures threatening the post-pandemic recovery.

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The Monetary Authority of Singapore, which uses exchange rates as its primary policy tool, said on Thursday it was taking steps to strengthen the local dollar, which will help slow inflation dynamics as global shocks unfold. affect local prices.

The specific moves – refocusing its policy range higher and increasing the appreciation slope – are the first time since April 2010 that the two tools have been used at the same time to tighten. After a tightening in October and another surprise decision in January, Thursday’s decision should help insulate the trade-dependent economy from supply disruptions caused by the war in Russia.

“It’s a more aggressive move” than in October and January, Selena Ling, head of research and treasury strategy at OCBC Bank in Singapore, said in an interview with Bloomberg Television after the announcement, while Sophia Ng, currency analyst at MUFG Bank in the city-state, said “this is the most hawkish move the MAS can take.”

Thursday’s guidance from the MAS signaled that an even bigger tightening is possible at the authority’s next meeting in October, said Wai Ho Leong, strategist at Modular Asset Management.

Singapore has been at the forefront of central banks across Asia acting to combat rising price pressures, alongside South Korea, which also moved on Thursday to further tighten policy. While many global peers, led by the US Federal Reserve, began to tighten earlier this year, most Asian policymakers, especially outside of China and Japan, are only just beginning to move away from the support for post-pandemic recoveries to fight inflation.

Read more: Inflation wave hits Asia with signs the worst is yet to come

The Singapore dollar rose the most in nearly a month after the decision, before trading down 0.4% at S$1.3564 as of 9:07 a.m. local time.

“This tighter monetary policy, which builds on the measures taken in October 2021 and January 2022, will slow inflation dynamics and help ensure price stability over the medium term,” the monetary authority said in the statement. communicated. “Further shocks to global commodity prices and supply chains are adding to domestic cost pressures and will drive underlying SAM inflation well above its historical average through 2022. Underlying inflationary pressures remain a medium-term risk.”

Core inflation, which excludes private transport and accommodation costs, is likely to rise to 2.5% to 3.5% in 2022, from 2% to 3% according to the January MAS forecast. Headline inflation in 2022 is likely to be 4.5% to 5.5%, versus earlier expectations of 2.5% to 3.5%.

The MAS has a unique approach to monetary policy. Rather than using interest rates to maintain price stability, it guides the local dollar into a policy range against a trade-weighted basket of currencies.

Read more: A central bank without a key rate? Yes, in Singapore: QuickTake

The policy is set by adjusting the slope, or rate of appreciation, as well as the width and center of the currency band. From the start of the pandemic until the October tightening, he had set the slope at 0%, implying that he was not looking for currency appreciation.

Before the decision, the 16 economists of a Bloomberg forecast some form of tightening. Only six predicted a double movement of recentering and elevation of the slope.

The monetary policy statement was announced at the same time as the government’s advance reading of the first quarter gross domestic product. The January-March economy grew 3.4% from the same period a year ago, against a median estimate in a Bloomberg survey for a 3.8% expansion.

Singapore has enjoyed relatively brighter growth prospects than neighboring Southeast Asian countries, especially as the recent easing of Covid-era mobility restrictions has breathed new life into struggling sectors of the economy. food and beverage and hospitality industry. The lifting of the city-state’s outdoor mask requirement, the resumption of nightlife and the easing of travel policies have bolstered expectations that the trade-dependent city-state can lead regional economies in dealing with Covid. as endemic.

The MAS, in its policy statement, said it expects the economy to grow “above trend” for a second year in 2022, with the output gap turning “slightly positive”. and GDP fully recovering from the pandemic. The central bank on Thursday reaffirmed the government’s growth forecast of 3% to 5% for this year, following a 7.6% expansion in 2021.

Details of MTI’s first quarter GDP, year-on-year, include:

  • Industry +6%, after +15.5% in the previous quarter

  • Construction +1.8%, after +2.9%

  • Service industries +3.9%, after +4.4%

(Updates with details throughout.)

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